How Will Google Digest Zagat?

Last week, Google bought Zagat, the restaurant-review company started in 1979 by Tim and Nina Zagat, in an attempt to expand its ability to offer consumers more information about local businesses.

Complicating this deal are two issues: One, Google is already being investigated for possible antitrust violations regarding allegations that the company stifles competition by undermining other online review sites. Two, Zagat currently partners with online service OpenTable to help diners make reservations at restaurants — a relationship whose future is now unclear.

KnowledgeToday asked three Wharton experts for their opinions on the acquisition.

Strategically, says Wharton operations and information management professor Eric Clemons, “It is a great move for Google and will [significantly] increase Google’s power in mobile commerce and in restaurant advertising as well as in restaurant bookings. It probably is not a great move for consumers, for restaurants or for Google’s competitors in search and in online commerce generally.” The deal, he added, will definitely bring greater antitrust scrutiny. “It looks like a small irrelevant move, but it will be followed by larger and more dangerous moves.”

Clemons predicts that Google will almost certainly change the way Zagat operates. “That was the point of the acquisition,” he states. “If Zagat does not become a booking site, and a way to influence both consumers’ bookings and restaurants’ advertising, then there was no point in the acquisition. I suspect that the Zagats will be quite happy to lose their jobs and their influence. They were paid a good price. If they had refused to sell, Google would simply have opened its own site, bootstrapped it by copying content from Zagat as they did with Yelp’s content, and put them out of business anyway. This way they at least got some money before being forced out.”

Meanwhile, the Zagat partnership with OpenTable will end, Clemons states. “The deal is intended to allow Google to replace OpenTable, not just to acquire Zagat. I call the move ‘the creation of GopenTable.'” The only way this acquisition could backfire on Google, he adds, would be “if the destruction of OpenTable could convince regulators and consumers that search engines should not be allowed to engage in vertical integration into their own content and into direct sale of goods and services. It is more likely that this …. [acquisition] will be approved, and that a wide range of other acquisitions will follow.”

When it comes to Google’s strategy, Kartik Hosanagar, Wharton professor of operations and information management, points out that the search firm “typically doesn’t buy companies that publish their own content. But the chance to land more local business ads may trump any concerns over this purchase…. Local search and local advertising is a big and consistently growing market. So it’s an important area of focus for Google. Within this space, reviews of local businesses and restaurants are among the most useful content. Such content will help Google retain users a little longer on its own website. This ultimately means more ad dollars.”

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Google has been interested in this content for quite some time, Hosanagar adds. “It even explored an acquisition of Yelp a few years back, although those talks fell through.”

As for possible antitrust scrutiny, Hosanagar suggests that Google’s purchase of Zagat is “partly a response to ongoing [federal] investigations. One of the issues raised by Google critics is that the company scrapes local content, like Yelp reviews, from other sites and displays the content in its properties, like Google Places. This eliminates a consumer’s need to go to sites like Yelp and hurts those firms who invested in creating the content. So far, Google’s response has been that it does so to ensure that consumers get the information in as few clicks as possible, but critics have described such attempts as anti-competitive. Google can now show its own content without having to worry about this scraping criticism. In the end, I believe Yelp is the loser in this deal.”

Wharton management professor Tyler Wry says that with this acquisition, “Google is clearly aiming to be the dominant player in every high growth area of the net. Even though the halcyon days of the dot-com boom are a distant memory, the web is still a bit of an open frontier with a diverse cast of players charging into new spaces…. I’m not sure if the appropriate metaphor is ‘Lewis and Clark’ or ‘the Blob’, but the bottom line is that Google is going to take a mom and pop shop supernova through this deal by integrating it with the local services it already has. On the surface, it seems a bit crazy to think about Zagat being a big threat to Yelp, TripAdvisor and Groupon, but I would be nervous if I was helming any of those companies today.” From a strategic perspective, he adds, Google’s purchase of Zagat is a “good acquisition.”

Wry agrees with others that the antitrust implications of the deal are “certainly a concern. Google may have done a bit of an end around on the issue, though. While the exact terms of the deal haven’t been disclosed — at least I haven’t seen them — it appears that they paid less than $66 million for Zagat, because the deal didn’t trigger a formal antitrust review. The issue would be a whole lot more interesting if Google [had bought] Yelp a few years ago for a billion dollars.” Google can accomplish much of what it wanted to do with Yelp through the Zagat purchase, Wry adds. “If it was also a strategic move to skirt government scrutiny — and it works — the whole thing looks pretty savvy.”

As for the future of Zagat’s partnership with OpenTable, Wry suggests that OpenTable would be unwise to make any demands if Google wants to keep them on as the reservation provider for Zagat. “It’s like your best friend getting invited to play in the major leagues and inviting you to come along…. If I’m Jeffrey Jordan [the founder of OpenTable], I’m sitting by my phone praying that I’m not the one without a chair when the music stops on this deal.”